Effectively reducing CO2 emissions

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Effectively reducing CO2 emissions

As of 2021, the German Federal Government will introduce CO2 pricing for the heating and transport sectors. Via the national CO2 emissions trading regulated in the Brennstoff-Emissionshandelsgesetz (BEHG, Fuel Emissions Trading Act), greenhouse gases emitted from heating and transport will have their price. The Federal Government will reinvest the income from CO2 pricing in climate protection measures and provide financial relief for citizens.

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National emissions trading is a more cost-efficient and fairer macroeconomic way to reduce emissions and meet climate targets. Parallel relief measures and funding benefit those who produce fewer emissions. By contrast, those who emit lots of CO2 have to pay more.

Companies that bring heating oil, natural gas, petrol and diesel onto the market will pay a CO2 price for these products as of 2021. They will be obliged to purchase emission rights for the greenhouse gas emissions that these fuels produce. This will take place via the new national emissions trading system in accordance with the BEHG. It has been set up by the Federal Government to complement the European emissions trading system, which already applies to the energy industry, energy-intensive industry and air traffic within Europe – and is successfully contributing to reducing emissions. Emitting CO2 is now set to have a price in the transport and heating sectors. 

Fixed price per tonne of CO2

The national emissions trading system (EHS) will launch in 2021 with a fixed price system per tonne of CO2. The German Emissions Trading Authority (DEHSt) at the Federal Environment Agency sells CO2 emission certificates to companies that bring heating and vehicle fuels into circulation.

A law is currently being debated in parliament which is set to raise the prices in the emissions trading system before its launch on 1 January 2021. The initial CO2 price per tonne will be €25 as of January 2021. After that, the price will gradually rise to €55 in 2025. A price corridor of at least €55 and a maximum of €65 will apply for 2026.

The Federal Government is beginning moderately to avoid too great a financial burden on citizens and companies.

Following this introductory phase, the CO2 certificates will be sold by auction. The overall number of certificates for CO2 emissions will be limited in line with the climate goals. The price will then be determined on the market by supply and demand.

Climate protection incentives

No price has been set to date for polluting the atmosphere with climate-damaging CO2 through heating and transport, as the European emissions trading system does not apply to these two sectors.

The new CO2 price will make it more expensive to use fossil fuels for heating and transport. As a result, using climate-friendly technologies like heat pumps and electric mobility, saving energy and using renewable energies will become more worthwhile.

Financial relief for citizens

There will not be an added burden on citizens in Germany as all the proceeds will be given back to them through funding measures and parallel relief measures. The Federal Government will use proceeds from CO2 pricing primarily to reduce the renewable energy levy and therefore electricity prices. In addition, there will be a rise in the tax-deductible commuting allowance, a mobility premium will be granted, and measures of the Climate Action Programme 2030 will be funded – to promote climate-friendly transport and energy-efficient buildings.

Overall outlook for Europe

Together with France, Germany wants to make CO2 pricing the main climate protection instrument used in all sectors throughout Europe. As a first step, a minimum price is to be added to European emissions trading.

European emissions trading is the EU's most important climate protection instrument. It requires energy companies, industry and air traffic within Europe to buy emission rights in the form of certificates for each tonne of greenhouse gas emissions released. The price of an emission certificate is market-based, i.e. it varies depending on the supply of emission rights and demand from market participants. Because the total number of these certificates is reduced each year, there are fewer and fewer certificates and their market price increases. In this way, the EU has successfully created an effective incentive to save energy and reduce greenhouse gas emissions. Due to the scarcity of emission rights, prices for each tonne of CO2 doubled in 2019. Also as a result of this price increase, considerably less CO2-intensive coal was burned to generate electricity in 2019. The energy industry’s CO2 emissions thus dropped by nearly 51 million tonnes in 2019.